Trading a covered combination strategy is a popular technique used by investors to generate income from a stock portfolio. This options strategy builder involves selling both a call option and a put option against a particular stock and holding it for the long term. A covered combination strategy is an excellent way to earn income while also limiting risk in the stock market. Here are some critical steps to follow to extract income by trading a covered combination strategy.
Select the Underlying Asset
The first step to trading a covered combination strategy is to select an underlying asset. The underlying asset can be any stock that you feel is a good investment for the long term. It’s essential to choose underlying assets that are stable and have limited downside risk. Check more on option strategies.
Set up a Covered Call
The next step is to set up a covered call. A covered call involves selling a call option against the underlying asset that you own. By selling a call option, you’re committing to selling your shares at a specified price in the future. You get paid a premium for this commitment. You can select a call option that expires in a few weeks, months, or even years with options strategy builder.
Set up a Cash-Secured Put Option
The third step is to set up a cash-secured put option. A cash-secured put option involves selling a put option against the underlying asset that you own. By selling a put option, you’re committing to purchase shares of the underlying asset at a specified price in the future. You shouldn’t sell more put options than you have the cash to purchase the underlying asset. Check more on option strategies.
Once you sell both a call option and a put option, you’ll receive a premium for each. The premium is the price that the buyer of the option pays for the right to buy or sell shares at the specified price. This premium represents the income that you’ll generate from the covered combination strategy with options strategy builders.
Repeat the Process
Once the options expire, you can repeat the process by selling new options against the underlying asset that you own. If the stock price rises, the call option might be exercised and you’ll be forced to sell your shares at the specified price. If the stock price drops, you might need to purchase shares at the specified price for the put option.
Close the Position
If the call option isn’t exercised or the put option isn’t assigned, you can close the position by purchasing the options back and selling new options at different strikes or expiration dates. Alternatively, you can hold the stock and continue to sell calls and put options against it in a perpetual cycle. This allows you to continue generating income from the underlying asset while also limiting risk in the market.
Monitor the Market
It is critical to monitor the market and the underlying asset regularly. Keeping up with news and developments related to the asset can help you to make informed trading decisions. It is also important to keep an eye on the value of the options you have sold to ensure that you’re not losing money on the option strategies.